Summary

With regards to inflation, any serious money-generated outbreaks of inflation looks unlikely. There is a possibility for occasional spikes in the aggregate price level, through production bottlenecks resulting from changes in the structure of demand, resulting from Covid-19, climate change policy or technology. Commodity prices could spike, but oil prices will likely remain between the $40 - $60 band. Metals' prices tend to follow oil, whereas above-the-ground commodity prices are driven by real incomes and should grow slightly faster than inflation. However, any such spikes are unlikely to instigate progressive inflation in the manner seen in 1960s, let alone a price, wage price spiral of the sort seen in the 1970s. Llewellyn does not see money in and of itself causing inflation, however it is noted that history is not always a perfect guide, and whilst they hold a fairly firm inflationary view, it is not rigid. Moving onto whether assets are frothy, or even overvalued, Llewellyn uses Shiller’s ‘excess cyclically adjusted price/earnings ratio’ to suggest that, at least with regards to US stocks, there is little evidence of over-valuation. The Minsky/Kindleberger typology was assessed, with 10 distinct points that lead to crisis and one of three things has to be happening: 1) Prices fall so low that people are tempted back into less liquid assets 2) Trade is cut off 3) A lender of last resort succeeds in convincing the market that money will be made available. The Minsky/Kindleberger behavioural typology would suggest that asset prices may be some way towards overvaluation. The extent of the problem that any overvaluation might cause will be determined by whether economic growth settles down at a satisfactory, sustainable rate post-Covid. If this does, economies can grow into present valuations, however if growth continues to disappoint, the likelihood of an asset price correction would grow. The resulting negative wealth impacts would hurt demand and output. The call moved on to Llewellyn’s scorecard heatmap which looks to measure the quality of structural policies in a variety of different countries. To conclude, achieving sustained post-Covid growth will become imperative and will require reforms of countries’ structural policies. In the long term, the supply side of monetary and fiscal policy settings will determine how quickly economies grow. "

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